Part 1

MSI has been approached by a fourth-grade teacher from Portland about the possibility of creating a specially designed game that would be customized for her classroom and environment. The teacher would like an educational game to correspond to her classroom coverage of the history of the Pacific Northwest, and the state of Oregon in particular. MSI has not sold its products directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting. The teacher has offered to buy 1,700 copies of the CD at a price of $6.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $410. A summary of the information related to production of MSIs current history program follows:

Direct materials	$	1.05
Direct labor		0.46
Variable manufacturing overhead		2.10
Fixed manufacturing overhead		1.80
Total cost per unit	$	5.41
Sales price per unit	$	13.00

Required: 1. Compute the incremental profit (or loss) from accepting the special order. 2. Should MSI accept the special order?

	Yes
	No

3. Suppose that the special order had been to purchase 1,700 copies of the program for $5.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario. 4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.)

Part 2.

MSIs educational products are currently sold without any supplemental materials. The company is considering the inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom bulletin board materials for teachers. A summary of the expected costs and revenues for MSIs two options follows:

	CD Only				CD with Instructional Materials
Estimated demand			33,000	units			33,000	units
Estimated sales price		$	28.00			$	44.00
Estimated cost per unit
Direct materials		$	5.75			$	6.25
Direct labor			7.00				10.00
Variable manufacturing overhead			7.00				10.25
Fixed manufacturing overhead			6.50				6.50
Unit manufacturing cost		$	26.25			$	33.00
Additional development cost						$	150,000

Required: 1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs. 2. Should MSI add the instructional materials or sell the CDs without them?

	Add the Instructional Materials
	Sell the CDs without Instructional Materials

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 18,000 units. Complete the table given below based on Requirement 1 and 2 data.

3-b. Should MSI add the instructional materials or sell the CDs without them?

	Sell the CDs without Instructional Materials
	Add the Instructional Materials